By Hiroko Komiya
Feb. 19 (Bloomberg) -- Premiums on euro put options have risen to the highest in almost a month as the European currency trades near the lowest since November on concern the region’s banks will report increasing losses.
One-month 25-delta risk reversals, which measure demand for calls and puts, show that the cost on euro put options rose yesterday to 0.61 percent higher than the cost for euro calls, the most since Jan. 26. The premium was 0.51 percent as of 11:50 a.m. today in Tokyo.
“The possibility of defaults or ratings downgrades in Europe combined with the euro’s break below technical support makes it very easy for the currency to continue its fall,” said Yuji Saito, the head of the foreign exchange group at Societe Generale in Tokyo.
“With the U.K. showing signs of welcoming a cheaper pound, Europe could get into a situation where it gets caught up in a round of competitive devaluations,” said Saito, adding that the euro’s October low of $1.233 was “on the horizon.”
The euro fell to $1.2513 yesterday, the lowest level since Nov. 21, and was trading at $1.2570 and 117.72 yen as of 11:50 a.m. in Tokyo.
A put option gives its holder the right without obligation to sell an underlying asset, while a call option gives the holder the right to buy an asset. Risk reversals show the prices of a call option relative to a put option on the same currency.
Moody’s Investors Service said on Feb. 17 it may cut the ratings of several banks with units in eastern Europe that are coming under “downward pressure,” citing weakening economies that may undermine the parent companies.
Implied Volatility
Implied volatility, a measure of expectations for future currency moves, on one-month euro-dollar options increased yesterday to a two-week high of 19.9 percent, and stood at 19.36 percent today in Tokyo.
A euro drop below $1.24 could cause implied volatility to soar as high as 25 percent, said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest lender by assets.
“Hungary and Poland are seeing their currencies at near record lows. It’s possible that the selling of European currencies will persist,” Sahara added.
If the Euro were to dip below its October level of $1.233, it might next test $1.2134, midway between its record high of $1.6038 and its all-time low of $0.8230, according to Societe Generale’s Saito.
Current measures of delta show perceptions in the market place a 30 percent likelihood that euro put options with strike prices at $1.2134 expiring on March 31 will be exercised.
Delta measures the rate of change in an option’s value relative to moves in the underlying asset price, and the figure also provides a rough approximation for whether the option will expire in the money.
To contact the reporter on this story: Hiroko Komiya in Tokyo at hirokokomiya@bloomberg.net
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